Remember to Increase your Payroll Contributions

Good news. Once again the IRS has increased the employee contribution limit for 401(k) and other retirement plans in 2020. The contribution limit has been increased from $19,000 in 2019 to $19,500 in 2020 for employees participating in the following types of employer-sponsored retirement plans:

  • 401(k)

  • 403(b)

  • Most 457 plans

  • Federal government’s Thrift Savings Plan (TSP)

And, to make it even better, employees age 50 and over have an extra opportunity to make contributions in excess of the $19,500 to these types of plans. The limit for these contributions, known as catch-up contributions, is now $6,500 in 2020, up from $6,000 in 2019. In most cases employees who are 50 or older can contribute a total of $26,000 of their own money into the above-mentioned retirement plans in 2020.

Review Your Contribution Elections

If your goal is to maximize your contributions to your employer-sponsored retirement plan, a good rule of thumb is to confirm at the start of each new year that your payroll contributions will continue to reach the IRS contribution limit. When setting your contribution elections, some plans will offer the option to “maximize.” This means your contributions will be evenly deducted from your paychecks for each pay period throughout the calendar year up to that year’s IRS contribution limits.

This can make it easier to ensure you are maximizing contributions rather than having to remember to adjust your contribution percentage each year so that you reach the limit. However, for plans that do not offer a “maximize” option, you may need to speak to a Human Resources/Payroll representative at work to manually adjust your payroll deductions so that you reach the contribution limit by the end of the year.

IRA Contribution Limits Remain Unchanged

Unlike 401(k) and other employer-sponsored retirement plans, the limit on annual contributions to IRAs did not increase in 2020. The IRA contribution limit remains at $6,000 and the catch-up for individuals age 50 and over remains at $1,000. However, IRAs can be considered to be another retirement savings vehicle for individuals looking to maximize their tax-deferred retirement savings.

In fact, under the new Setting Every Community Up for Retirement Enhancement (SECURE) Act, individuals can continue to contribute to traditional IRAs at any age, as long as they continue to have earned income. Previously, individuals could not contribute to traditional IRAs beyond age 70.5.  The passing of the SECURE Act creates more opportunity for tax-deferred retirement savings. But do note that certain income phase-outs still apply to the tax-deductibility of traditional IRA contributions

Coordinate Your Contributions with your Financial Plan

There are other important factors not covered in this article that should be considered, including contribution type (pre-tax, Roth, after-tax) and eligibility for tax-deductible contributions. A financial adviser can explain the nuanced rules and various options, and help you to determine how much you should contribute to retirement plans/IRAs based on how they fit in with your retirement goals and your overall financial plan.

At Modera we want to be sure you’re up to date on all the financial legislation that could affect you. If you’d like to discuss your retirement plan contributions with a Modera adviser, please contact us.

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